The US Commerce Department said on Thursday that US GDP fell by 1.4% on an annualised basis in the first quarter, indicating a sharp reverse for an economy due to a rebound in Covid-19 cases which interrupted activity.
The first quarter of US economic growth unexpectedly decreased by 1.4% as a rebound of COVID-19 cases interrupted activity, yet the drop in output creates a mixed picture of the economy amid strong domestic demand.
Rising omicron infections slowed activity across the board at the start of the year, inflation spiked to levels not seen since the early 1980s and the Russian invasion of Ukraine added to the economic stalemate which hamped economic growth in some nations.
The 1.4% decline in US GDP was the first drop in nearly two years, following the pandemic recession. In the fourth quarter of 2021, the economy expanded at a solid 6.9% rate.
Economists polled by Reuters had forecast the economy growing at a 1.1% rate and Dow Jones predicted a 1% increase in GDP for the quarter, both were missed by the negative growth rate.
While the reports may elicit shrieks of stagflation and recession from some quarters, it does not accurately reflect the economy.
The slowdown in growth was caused by a reduction in private inventory investment, which had fueled growth in the second half of 2022.
A 3.2% trade deficit and a slower-than-expected inventory buildup, exports and government spending across state, federal, and local governments, as well as increased imports, were further constraints and lead to a drop in GDP.
As a result, a measure of domestic demand excluding trade, inventories, and government spending increased sharply from 2.6% in the fourth quarter, approximately 85% of total spending is spent on final sales to private domestic buyers.
Defence spending cuts of 8.5% were a significant drag, wiping a third of a percentage point off the final GDP figure.
As part of its fight against inflation, the Federal Reserve hiked its policy interest rate by 25 basis points in March, the first increase in more than three years.
In March, annual consumer prices rose at their fastest rate in 40 years. Despite rising food and gasoline prices, there is little evidence that consumers are pulling back.
Consumer spending increased by 2.7% in the quarter, despite continued price pressure from inflation.
Next Wednesday, the Federal Reserve is likely to raise interest rates by 50 basis points and begin reducing its asset holdings said Reuters.
The Labor Department released separate data on Thursday indicating that initial applications for state unemployment benefits declined 5,000 to a seasonally adjusted 180,000 for the week ending April 23. This reflected improving labour market conditions.
Strong wage growth despite a tightening job market, as well as at least $2tr in surplus savings collected during the pandemic, are helping to keep inflation at bay.
Lower-income customers, who are disproportionately hit by inflation, were displaying stronger resilience, according to Bank of America Securities data.
Nevertheless, there are concerns that the Fed may tighten monetary policy too quickly and send the economy into recession during the next 18 months. The 30-year fixed mortgage has risen beyond 5%, indicating that the property market is already declining.
While most economists believe the United States will avoid a full-fledged recession as risks are increasing, a lot depends on how quickly geopolitical tensions and supply chains dissipate, as well as whether or not inflation falls.